Sheila Bair: Dodd bill 'makes [bailouts] impossible'
As head of the FDIC, Bush appointee Sheila Bair is in charge of dismantling failed banks. As The Hill wrote, Bair has been fiercely critical of the pro-bank shape of the financial rescue. "Market discipline," she's said, "must be more than a philosophy to ward off appropriate regulation during good times. It must be enforced during difficult times." So she has some real credibility on the issue of bailouts. And in an interview with American Banker's Rob Blackwell, she says the Dodd bill prohibits bailouts. Full stop.
Would this bill perpetuate bailouts?
SHEILA BAIR: The status quo is bailouts. That's what we have now. If you don't do anything, you are going to keep having bailouts. Bankruptcy doesn't work — we saw that with Lehman Brothers.
But does this bill stop them from happening?
BAIR: It makes them impossible and it should. We worked really hard to squeeze bailout language out of this bill. The construct is you can't bail out an individual institution — you just can't do it.
In a true liquidity crisis, the FDIC and the Fed can provide systemwide support in terms of liquidity support — lending and debt guarantees — but even then, a default would trigger resolution or bankruptcy.
Critics say the bill would let the FDIC pick and choose creditors to pay back in a resolution. Is that a form of a bailout?
BAIR: We've always had that. You close a bank, you set up a bridge bank, and you have IT service providers, property upkeep — they are general creditors. You want to keep paying them to keep the services going.
That's just an example. You need to keep that kind of thing going to maintain the franchise value. You have the power to do that in bankruptcy too.
The FDIC will provide detailed disclosure of any creditor that receives more than others of the same class. Let's be clear, this is limited only to those essential to maintain critical functions and preserve value of assets to benefit all creditors. It will not include bondholders or shareholders.
April 15, 2010; 4:10 PM ET
Categories: Financial Regulation
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